2003 market to set some benchmarks

Kim Anderson | Jan 02, 2003

Between now and harvest, wheat prices are expected to be volatile and to decline to $3.20 per bushel. Low 2003 wheat production could cause the June 2003 wheat price to be $4 while high wheat production could cause wheat price to be below $3. Both $5 wheat and $2.50 wheat are possible prices for the 2003/04 wheat-marketing year.

Some producers prefer to anticipate wheat prices movements and to tailor marketing plans to fit what is happening in the market. Anticipating price movements requires benchmarks.

Some market analysts (myself included) contend that this type strategy is more risky than using mechanical strategies.

It is my belief that the best way for most wheat producers to market wheat is to develop a mechanical marketing plan. The plan may be simple strategy or have triggers (benchmarks) to determine when wheat is to be sold.

Specifying certain dates to sell wheat is a simple mechanical plan. The plan may be to sell all the wheat at harvest (across the scales or at the end of harvest) or sell the wheat in lots (i.e. one-third at harvest, one-third on Oct. 1 and the final third on Nov. 15).

Producers who try to predict the market must have benchmarks. These benchmarks may include both technical (futures market contract movements) and fundamental (supply and demand) information.

Technical information is useful to anticipate short-run price changes. The Kansas City Board of Trade (KCBT) contracts currently being used for technical analysis are the March contract for 2002 wheat in storage and the July contract for wheat to be harvested in 2003.

KCBT March contract prices to watch are $3.80 and $4. Two consecutive closes (final price of the day) below $3.80 will signal that current wheat prices will be expected to fall another 20 cents. Two consecutive closes above $4 will signal that wheat prices are expected to increase another 20 cents.

Benchmark prices for the KCBT July wheat contract are about $3.35 and $3.50. Producers contemplating pricing 2003 wheat should watch these price levels.

Fundamental benchmarks include projected U.S. and foreign ending stocks and 2003 wheat production. Stocks are tight enough (especially in the United States) to have a potentially large price impact in both the short and long-run.

Increased production and exports out of the Black Sea region has changed market dynamics. Thus, benchmarks are not as easy to set as they were a few years ago.

In the 1995/96 wheat-marketing year (June 1 through May 31), U.S. wheat ending stocks fell to 376 million bushels and U.S. wheat prices went above $7 per bushel and averaged $4.55 for the marketing year. This marketing year U.S. wheat ending stocks are projected to be 348 million. Wheat prices peaked at about $4.85 and are projected to average $3.80.

For U.S. wheat stocks to increase in the 2003/04 marketing year, U.S. wheat production must be 2.15 billion bushels or higher. Production of 2.15 billion bushels or higher should result in wheat prices being $3.20 or lower at harvest. Production below 2.15 billion bushels will result in higher prices.

Foreign production also impacts U.S wheat prices. For foreign wheat stocks not to decline the sixth year in a row, foreign production must be above 20.7 billion bushels. Lower production implies higher prices and higher production, lower prices.

Tight U.S. wheat stocks and below average foreign wheat stocks could result in relatively high wheat prices. However, higher wheat prices have resulted in increased wheat planted acres and increased fertilizer use. Thus, the odds are that average production in 2003 will result in lower wheat prices.

Benchmarks may be used to recognize potential price movements. And the weather will determine production and the prices.

Dr. Anderson is an economist at Oklahoma State University in Stillwater. Readers may call 405-744-6082, or e-mail[email protected].